Analysis: For Fed, a muddled jobs report even as U.S. employment continues to expand

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United States Federal Reserve Board building is shown in
WashingtonThomson
Reuters

By Howard Schneider and Jason Lange

WASHINGTON (Reuters) - A mixed U.S. jobs report on Thursday may
not give Fed chair Janet Yellen the "decisive evidence" of labor
market recovery she wants to see before raising interest rates.

The June employment report showed a modest jump in jobs but no
wage growth, a renewed fall in the labor force participation
rate, and no improvement in some of the weak corners of the
economy that Yellen watches closely.

The number of people involuntarily stuck in part time jobs, for
example, was little changed from the month before and has stalled
for the last three months at around 6.5 million.

On their own, none of that may be enough to stop the Fed from an
interest rate hike many expect in September. But the lack of wage
growth in particular is counter to what Fed officials say they
want to see.

Investors, already doubtful the Fed could raise rates amid
turmoil in the euro zone, moved their expectations for an initial
rate hike solidly into 2016.

"The lack of a sustained acceleration in wage growth could prompt
the Fed to keep pushing back the timing of the first rate hike,"
said Paul Dales, senior U.S. economist for the Capital Economics
consulting firm.

Still, with the jobs market continuing to grow and the
unemployment rate likely approaching full employment, "a
September rate hike is very much in play," Dales added.

The 223,000 jobs created in June is still considered a solid
number, and above average for the year so far. The unemployment
rate fell from 5.5 percent to 5.3 percent, already within the
range Fed officials expected to be reached by the end of the
year.

But the decline occurred for the wrong reasons - a drop in the
labor force participation rate from 62.9 percent to 62.6 percent.
People who are out of the labor force are not included in the
calculation of the unemployment rate.

Fed officials were encouraged by the fact that the participation
rate had stabilized over the last year, and took it as evidence
economic recovery was reaching more corners of the labor market
and encouraging people to take a job or begin hunting for one.

The move down, resuming a trend that set in during the 2007 to
2009 recession, is "worrisome," said Mohamed El-Erian, chief
economic adviser at Allianz insurance in California. "This will
fuel the secular stagnation debate," and "raise questions about a
September interest rate hike."

The Fed may take heart from the decline in the number of
long-term unemployed by nearly 400,000, from an estimated 2.5
million to around 2.1 million. But it is impossible to tell from
the monthly report how many of those people got jobs, and how
many may have contributed to the fall in the participation rate
by dropping out of the labor force.

Officials at the Bureau of Labor Statistics caution against
reading too much into the smaller categories of the employment
report, which are based on a monthly survey and can be volatile.

But for the Fed, the June report is at best ambiguous. The report
is likely to invigorate debate about whether the economy's rate
of full employment has drifted lower -- a development that would
explain why wage growth remains weak and move one of the Fed's
chief goal posts.

Alongside the modest June job growth, what were considered strong
reports in April and May were revised lower.

"It is clear that the economy is continuing to leave workers high
and dry," said Elise Gould at the Economic Policy Institute. "It
is more than obvious that the Federal Reserve needs to stay the
course."

(Reporting by Howard Schneider; Additional reporting by Mike
Flaherty in Washington and Jon Spicer in New York; Editing by
Andrew Hay)